Suppose the Schoof Company has this book value balance sheet:
Current Assets: $30,000,000 Current Liabilities: $20,000,000
Fixed Assets: $70,000,000 Notes Payable: $10,000,000
Total Assets: $100,000,000 Long Term Debt: $30,000,000
Common stock (1 million shares): 1,000,000
Retained Earnings: $39,000,000
Total liabilities and equity: $100,000,000
The notes payable are to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the company’s permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of $1,000, an annual coupon interest rate of 6%, and a 20 year maturity. The going rate of interest on new long term debt is 10% and this is the present yield to maturity on the bonds. The common stock sells at a price of $60 per share. Calculate the firm’s market value capital structure.